Suppose that in the fixed-income securities market, the current one-year, two-year, and three-year spot interest rates are 7.000%, 7.250%, and 7.500%, respectively. (That is, R^Mrkt_0,1 = 7.000%, R^Mrkt_0,2 = 7.250% , and R^Mrkt_0,3 = 7.500%.) . In addition, in the market, the current two-year forward rate one-year from now (F^0,Mrkt_1,2) is 7.625%. (This is the only forward interest rate available in the market.)

What should be an arbitragers strategy at t = 0 ?

S1) They will enter into a forward rate agreement, whereby, they will [Borrow Land Do Nothing] at two-year forward rate one-year from now.

S2) They will [Borrow Land Do Nothing] at one-year spot rate.

S3) They will [Borrow Land Do Nothing] at two-year spot rate.

S4) They will [Borrow Land Do Nothing] at three-year spot rate.